Friedman: We Are on the Brink of a Global Export Crisis

Friedman said that dynamics in the global economy changed in 2008. Countries with excess capacity such as China and Germany had ramped up exports. This strategy worked in the short term.

However, a side effect of this was that exporters have become too dependent on consumers whose consumption declined sharply after 2008. This has also resulted in a surge of oil and raw material prices.

However, the core issue of stagnating global demand still remains. And ultimately, this is a political problem rather than an economic one.

Exporters Are in a Shambles

Friedman began with problems in the EU. He said that the EU’s efforts to dictate distribution of wealth created the economic problems that now plague Europe. This led to assorted political uprisings, such as the most recent one in Italy.

Elite contempt for populist parties is strengthening them. Europe is fragmenting. We now see something emerging that looks similar to the 1920s.

Meanwhile, Russia depends on oil exports that rely on industrial demand. This makes Russia inherently unstable from an economic standpoint. For this reason, it tries to assert itself in other ways.

China gets 20% of its GDP from exports, down from 40%. Friedman said Xi Jinping is facing major economic headwinds. Key among them are overcapacity, unstable banks, and a real estate bubble. On top of that, capital flight out of China is accelerating.

Something has to give, and this scares Xi Jinping. That is why he recently made himself leader for life. This is a sign of weakness, not strength. China is in a very tenuous situation, much like Russia.

Exporters’ Reliance on the US Creates Systematic Risk

Friedman pointed out that big export economies need the US because it is the world’s biggest importer. China, Russia, and even the EU’s financial stability relies on exports to the US.

If the US falls into a recession, Germany will hit the wall as an exporter. That means its manufacturing capacity will shrink, which will impact the price of oil. This will, in turn, hurt the Saudis and their neighbors who need oil revenue to support their economies.

In other words, a recession in the US could create a domino effect that sparks a global crisis.

The World Is in Social Crisis

Later Friedman turned to politics.

He first addressed the election of Donald Trump. Trump ran a campaign based on the promise of bringing jobs back to America. It resonated deeply with Americans who have seen their standard of living fall. The argument was that the transfer of productivity out of the US was the cause.

This slice of the US electorate is the group with the highest birth rate. Yet, in this large social class we are seeing big social breakdowns. The repercussions will come back politically.

The problem in the US is the outcome of an economic process where a surge in global GDP was fueled by importing nations. But in making the US economy more efficient, by reducing the workforce, we’ve created a social crisis. And that social crisis elected Trump.

These types of things are politically and socially unsustainable, in both the US and Europe.

China and Russia are desperately trying to hold things together since the promises they made to the public haven’t happened.

Upper middle class workers that are displaced into the lower rungs of employment and wages have created a social and political crisis. This is happening on a global scale, and it will compound until it results in radical changes.

It’s important for economists to understand that just because GDP increases at 2% annually, the problems have not and will not go away without big disruptions.

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